Amid economic changes, low returns, ANZ Private adapts

29 September 2017

One of the most intricate dances is that of market dynamics and consequential investor behaviour. As markets change, investors must adapt; and as their strategies shift, markets respond.

Sometimes investors are able to anticipate the market. Other times they must catch up. But they can never stop moving. As markets evolve, so do all investment-solutions providers, including ANZ Private.

The next period in markets will be one where paying close attention is vital. Central banks are moving to end a period of unprecedented monetary policy. Rates are beginning to ‘normalise’ and markets are changing once more. The new investment environment will have familiar-seeming aspects that could hide new trends and reward those who are watching carefully to gain insight.

What’s going on in the Australian economy

As these changes mount, ANZ chief investment officer Mark Rider is paying close attention to several developing issues in Australia’s domestic economy.

Key among them is wages. June-quarter wage growth of 1.2 per cent and the addition of more than 280,000 jobs in the past 12 months are evidence that the long period of lacklustre labour market performance could be over soon, with implications for consumer spending and businesses that depend on it.

Increased consumer spending might spark a revival in inflation, that has been otherwise sluggish. It’s been below the Reserve Bank of Australia’s target range of 2 per cent to 3 per cent and the central bank has indicated it will be low “for some time”. But inflation is necessary for the bank to lift the official cash rate from its current record low of 1.5 per cent.

Until rates are higher, investors will face challenges in their ongoing search for yield. And that means being smarter than ever about how investments are made, says ANZ Private head of investments and advice James Dunlop.

ANZ Private reworks its investment strategy

Such an environment has demanded some re-engineering this year of key elements in ANZ Private’s investment strategy. Consequently it has changed not only strategic asset allocation, but made significant changes to how investments are managed on behalf of clients.

“I wanted to ensure that whatever we did we started with a strong set of foundations linking back to what the client wanted,” says Dunlop.

ANZ Private reviewed its whole investment business, starting with its investment philosophy, and asset allocation, all the way down to how stocks are bought and sold.

The investment philosophy of ANZ chief investment officer Mark Rider remained unchanged following the review:

ANZ Private remains a long-term investor with a belief in the power of diversification.

It believes markets inefficiencies can create opportunities.

Investment management should be simple, with:

transparent focus on high-quality assets

good governance

tax awareness.

While the review determined the philosophy of investment would not change, ANZ Private’s strategic asset allocation did. The mix of assets in discretionary portfolios was expanded to include infrastructure, alternative assets and real estate.

“Diversification is the only free lunch,” Dunlop says, noting that a lot of recent returns in global markets have come from assets other than equities and bonds. These additional asset classes give the potential of returns when equities markets are underperforming.

Strategic allocations provide a guide for the share of funds invested in various asset classes. And tactical asset allocation allows these proportions to be increased or decreased in the short term: for example, increasing holdings if an asset looks cheap, or decreasing holdings if short-term geopolitical risks make its downsides especially large.

Such decisions are not taken lightly, given the expense of buying and selling assets.

“When you are no longer talking about double-digit returns, you are talking about single-digit returns – you need to be really careful where you are spending your clients’ fees,” says Dunlop. “This means diligently ensuring there is value in active management after fees.”

ANZ now uses a mix of passive and active approaches in different asset classes. It favours, for example, a passive approach to ownership of the top 20 companies (by market capitalisation) listed on the Australian Securities Exchange. By contrast, research revealed there are advantages to active management of Australian companies outside that top 20. But that is not the case in all asset classes.

Deciding the best investment managers

The best way to actively manage assets was one of the big questions ANZ Private considered in 2017 and the question prompted wholesale change.

Instead of managing funds in-house, the bank decided the best option was to go to “best of breed” external funds managers.

Whittling down hundreds of Australian funds managers to a shortlist was a rigorous process, for which ANZ engaged Mercer, James Dunlop explains. Mercer had requirements for each asset class manager. They needed to:

be aligned with ANZ Private’s philosophy

have a proven track record, strong management and strong returns

ensure they had the right level of resources.

In short, “we were keen to see managers that have skin in the game”, says Dunlop.

Mercer brought forward recommendations for several top funds managers where the advantages of active management could be expected to outstrip cost of fees.

A shift from in-house investing to seeking the best available in the market has global precedents. Harvard University's famed endowment fund, with $US37 billion under management, recently switched from in-house management after being consistently beaten in performance by Yale University’s endowment fund, which does not rely on in-house stock-pickers.

To manage Australian equities investment, ANZ Private has engaged Yarra Capital Management, formerly known as Goldman Sachs Asset Management. Yarra manages $7 billion in assets and its staff visit more than 1000 companies a year as they analyse Australian listed entities in pursuit of opportunities.

Yarra takes charge of Australian equities investing

“We are still stuck in a really low-growth, low-returning environment … a concentrated basket of hand-picked companies do, however, look attractive by virtue of the growth prospects but also the dividends that are available,” Hershan says.

“The advantage of Australian equities is they are Australian-dollar denominated. There is no real currency risk. Equally, by investing in Australian equities you capture the benefits of high-dividend yields versus other parts of the world, and equally the benefits of franking credits.“

Yarra is a long-term investor, analysing companies on a five-to-seven-year time horizon.

“We analyse companies, industry structures, boards and management teams to form our view,” Hershan says. “We think in a world that is becoming increasingly short term you are rewarded for being patient. There is little to be gained by trading stocks – patience is more tax efficient and more brokerage efficient as well.”

On behalf of ANZ, Yarra is invested in a portfolio of more than 20 Australian stocks from the S&P/ASX 200 index, excluding the S&P/ASX 20. Included in the portfolio are services companies SEEK, carsales.com and The Star Entertainment Group, medical technology company ResMed and resources company Alumina.

Beginning and ending with clients

Alongside Yarra Capital Management, ANZ has engaged a range of other investment management firms for asset classes including international equities, international fixed income and domestic fixed income.

These relationships are constantly monitored to ensure the managers are performing and delivering value for clients. James Dunlop says is the common thread that runs through all the changes ANZ Private has made.

“The one thing that we have been trying to do – whether running the investment solutions or whether we are building engagement models for the client – it’s talking to our clients. I make sure I get out to client meetings,” he says.

“We’re talking to our advisors – trying to understand what it is that our clients like and don’t like and their expectations. All solutions need to be built back from the client.”

Jason Murphy is an economist, media commentator, journalist and corporate writer based in Melbourne.

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